ForumsSolo 401k LoanBest use for Solo 401K funds for loans vs withdrawls

Forums Solo 401k Solo 401k Loan Best use for Solo 401K funds for loans vs withdrawls

  • Best use for Solo 401K funds for loans vs withdrawls

    Jason R. Escamilla, CFA replied 3 months, 1 week ago 3 Members · 3 Posts
  • 2 Replies
  • Top SubjectSolo 401k Loan
    Top ForumsSolo 401k Loan

    Wayne B
    Top SubjectSolo 401k Loan

    April 1, 2024 at 4:32 pm

    What is better, take a $50,000 401k loan for a car, or for a new primary residence to bring mortgage payment down; or is it better to finance either or both with private financing or use cash from 401k for either and pay the tax penalty for withdrawal of funds? I am retired with permanent income to pay off funds and have a consultant business that generates additional funds.

    Wayne B
  • Mark Nolan

    Top SubjectSolo 401k,Solo 401k Contributions
    Top ForumsSolo 401k, Solo 401k Contributions

    Mark Nolan

    Mark Nolan

    Top SubjectSolo 401k,Solo 401k Contributions

    April 3, 2024 at 2:09 pm

    @IMPACT

    Jason R. Escamilla, CFA

    Top SubjectIRAs and 401k plans Under Attack – Act Now!,Solo 401k Loan

    Jason can shed more light from a planning perspective.

    A couple of items to keep in mind when deciding to borrow from your 401k whether a solo 401k plan or a traditional 401k plan offered by a day-time employer are the following:

    1. The lost opportunity of generating tax deferred earnings based on investments since the funds would leave the plan.

    2. 401k loan payments are made with after-tax funds (i.e., with funds from your personal bank account) and you can’t take an interest deduction. Therefore, you are effectively getting double taxed once you start making distributions at retirement.

  • Jason R. Escamilla, CFA

    Top SubjectIRAs and 401k plans Under Attack – Act Now!,Solo 401k Loan
    Top ForumsIRAs and 401k plans Under Attack – Act Now!, Solo 401k Loan

    Jason R. Escamilla, CFA

    Jason R. Escamilla, CFA

    Top SubjectIRAs and 401k plans Under Attack – Act Now!,Solo 401k Loan

    April 3, 2024 at 2:34 pm

    Hi Wayne- can you further define “better”?

    I’m of the opinion that a 401k loan is best for someone with a temporary cash shortage. This means there is a clear path to repayment from a surplus of future income above and beyond future savings needs.

    In your case, if I understand correctly, you have plenty of income but not plenty of taxable savings to use instead–?

    If not the above, perhaps it’s best to think of the 401k loan as potentially a future distribution if cash flow tightens. And if you’re over age 59.5 (retired), your risk is limited to the income tax hit and not the 10% of any state penalties.

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